Estate agents — Duty to purchaser — Subsale at inflated price to defraud mortgagee — Failure of estate agents to inform vendor — Whether vendor entitled to damages for loss of right to renegotiate sale price
In September
1989 the plaintiff, who had earlier purchased a flat on a long lease and
refurbished it, instructed the first defendant estate agents to find a
purchaser. A Mrs B made an offer to purchase in November 1989, which was
accepted. On January 4 1990 purported references were given by solicitors for
the purchasers to the third defendant, a sales executive employed by the first
defendants, for the purpose of obtaining the landlords’ consent to the
assignment. Those references were in fact on behalf of a Miss De B. On January
9 the landlord’s solicitors by fax sought clarification from the first
defendants as to the identity of the proposed assignee. On January 19 1990
contracts were exchanged for the sale of the flat to Mrs B for a consideration
of £210,000. By letter dated January 25 1990 solicitors for Mrs B submitted a
transfer to the plaintiff’s solicitors for subsale to Miss De B in
consideration of £395,000 to be paid as to £210,000 to the plaintiff and
£185,000 to Mrs B; the sale was completed on February 6 1990. The plaintiff
claimed that the defendants knew of the subsale since January 4 1990, failed to
disclose their knowledge and were liable for not acting in the plaintiff’s best
interests. Had the plaintiff known of the fax of January 9 he would have
renegotiated the sale.
judgment for the defendants for the sale commission. The conclusion was that
the subsale was a bogus transaction to defraud Eagle Star, who loaned £296,000
on security of the flat. The market value of the flat at the time of the sale
was about £210,000. The third defendant’s action in merely passing on the
references of January 4 1990 without reading them was not unreasonable. As no
evidence was given on behalf of the defendants in relation to the receipt of
the fax of January 9 1990 it must be concluded that it was either lost or
ignored; that fell short of the ordinary standards of care. However, it was far
from clear that the existence of the subsale would have been unearthed. If active
attempts had been made to delve into it, it may have come grinding to a halt.
If the subsale had been known to the plaintiff, and he had renegotiated to
participate in the inflated price, he would have been a party to the fraud on
Eagle Star and would have held any profit as a constructive trustee.
Accordingly, he would have suffered no loss.
The following
cases are referred to in this report.
Jackson v Packham Real Estate Ltd (1980) 28 OR (2d) 261
Kepple v Wheeler [1927] 1 KB 577
Punjab
National Bank v De Boinville [1992] 1 WLR
1138; [1992] 3 All ER 104; [1992] 1 Lloyd’s Rep 7, CA
This was a
claim by the plaintiff, Israel Berkowitz, against the first defendants, MW (St
John’s Wood) Ltd, and the third defendant, Mr De Brito, for damages in relation
to the defendants’ duties as estate agents.
Jonathan
Ferris (instructed by H M Rose & Co) appeared for the plaintiff;
Christopher Russell (instructed by Berrymans) represented the first and third
defendants; the second, Winkworth, and fourth, Nadir E Bhoutross, defendants
did not appear and were not represented.
Giving
judgment, MR D W STEEL QC said: The plaintiff in this action, Mr Israel
Berkowitz, is a builder and property developer. In February 1989 he bought a
flat, 310 Clive Court, in Maida Vale, with a view to refurbishing it and
reselling it at a profit. The purchase price was £135,000. He anticipated that
the cost of refurbishment would be in the region of £50,000 to £60,000 and he
financed the whole scheme by way of an overdraft with Lloyds Bank, the bank
being secured partly by a charge on the flat and partly by a guarantee from a
business friend of Mr Berkowitz. The plaintiff obtained possession of the flat
in March 1989 and, soon afterwards, put in a team of workmen (who lived on the
site) to perform the refurbishment.
The work was
completed at the end of the summer and in September Mr Berkowitz instructed the
first defendants to act as his agents for the disposal of the property. The
third defendant, Mr De Brito, a young sales executive employed by the first
defendants, wrote to Mr Berkowitz on September 14 1989 confirming instructions
to the firm to act as agents with an asking price of £250,000 for the flat. I
should explain that the proceedings against the second and the fourth
defendants were not pursued. As regards the letter of September 14, there was
some dispute as to how the figure of £250,000 was arrived at. I conclude, so
far as the point matters at all, that Mr De Brito had suggested around
£220,000, but that Mr Berkowitz insisted on a higher figure being sought.
A number of
people viewed the flat, but it was not until October that an offer was
forthcoming. This was for £230,000 from a Mr Wullopillai. Mr Berkowitz told Mr
De Brito that the figure was acceptable and letters of confirmation of the deal
went out to the interested parties. Mr Berkowitz’s solicitors, H M Rose &
Co, sent a draft contract to the purchaser’s solicitors on October 25, but
there never was any response and, in due course, the sale fell through.
Mr De Brito
and Mr Berkowitz discussed the situation, and the property was remarketed at an
asking price of £239,950 in early November. This time the first defendants also
used the services of subagents, who were to share the commission in the event
of a sale. Mr Berkowitz gave oral evidence and elaborated on his financial
position at this stage, which I summarise as follows.
The purchase
price of the flat, together with the cost of repairs, had meant that he had
drawn down the bulk of his overdraft facility. In addition, increasing levels
of interest rates were threatening the viability of his project and, with the
property market weakening, he was anxious to sell sooner rather than later.
This approach no doubt commended itself to his bankers and indeed on November
13 Mr Berkowitz prevailed upon Mr De Brito to write to the bank, suggesting
that it was hoped to get £230,000 from the sale. Mr De Brito told me in
evidence (and I accept) that that was, so far as he was concerned, on the
optimistic side.
On November 22
a subagent, Vickers, showed a Mr Sabargi round the flat. This gentleman made a
further visit on November 27 and, that same day, an offer of £212,000 was made.
It is not clear whether Mr Sabargi made the offer or someone else; anyway, it
was made on behalf of a Mrs N E Bhoutross. Mr Berkowitz accepted the offer. As
he said in evidence, ‘If I waited any longer, I would start to make a loss’.
The usual
correspondence then ensued between solicitors for the parties. One feature of
the arrangements for the sale needs, however, some special mention. The
landlord’s consent was needed for the assignment and, for this purpose, their
solicitors, Carter Faber, requested references from the purchasers.
It appears
that on January 4 1990 two purported references were faxed to the subagent,
Vickers. They were brought round by hand to Mr De Brito, who that evening faxed
them on to Carter Faber without reading them. In fact the two documents were
not satisfactory from the point of view of Carter Faber since they appeared to
be in respect of a Miss Karolina De Brovolska and not Mrs N E Bhoutross. Having
been asked by Mr Berkowitz’s solicitors to provide a licence to assign, they
(Carter Faber) faxed Mr Jonathan Hall on January 9 in the following terms:
Dear Jonathan,
Further to
our several recent telephone conversations, I have now received by fax a letter
from H M Rose & Co requesting a licence to assign the above premises. The
assignee is stated to be Mrs N E Bhoutross. As mentioned on the phone, however,
the references sent to me by Tony De Brito are in respect of Miss Karolina De
Brovolska.
I look
forward to hearing from you as soon as possible as to who is the correct
proposed assignee, before sending out the draft licence. Clearly if the
assignee is to be Mrs N E Bhoutross, I want a banker’s reference for her,
confirming an ability to pay the ground rent and the service charge, which
amounts of course should be specified.
Mr Hall did
not give evidence. Suffice it to say for the moment that no action appears to
have been taken on this fax by anyone in the first defendants’ office.
Mr Berkowitz’s
solicitors were under some pressure from him to finalise the deal with Mrs
Bhoutross, but on January 10 (the next day) the buyer’s solicitors wrote to
them, saying:
We thank you
for your telephone call. We tried to return the call. We have, however, now
taken our clients’ further instructions and we understand that finance has been
arranged.
However,
there is a problem with regard to the valuation of the property and we are
instructed that our clients are prepared to proceed at a price of £200,000,
subject to contract.
We look
forward to hearing from you . . . grateful if you could let us know the present
situation regarding the landlord’s consent. We are instructed to proceed to an
early exchange, provided your clients agree to the above price reduction.
When Mr
Berkowitz was informed of this turn of events, according to Mr De Brito, he
nearly panicked. None the less, it was viewed as a try-on and was rejected that
very same day.
Further
negotiations then took place, leading to a letter from the buyer’s solicitors
on January 15, which reads as follows:
We thank you
for your letter of 10th January. We understand from our clients that your
clients have now accepted the offer of £210,000, subject to contract. We should
be grateful, therefore, if you could confirm this matter and proceed to almost
immediate exchange.
We understand
our clients have a £10,000 deposit. Please confirm that this is satisfactory .
. . contracts can be exchanged as soon as we speak with you further.
You may
recall we are waiting to hear from you with regard to our letter of 10th
January. Perhaps we could hear from you today by fax, please. We would also be
grateful if Messrs Lomazni Berwick could have authority to inspect the register
in due course.
Mr Rose, the
plaintiff’s solicitor, told me (and I accept, of course) that he thought the
reference to Lomazni Berwick was probably a reference to solicitors acting for
the purchaser’s mortgagees. Unknown to him, they were in fact the very same
firm which had obtained references for Miss De Brovolska.
There followed
a flurry of activity leading to an exchange of contracts on January 19,
following threats earlier the same day by Mr Berkowitz’s solicitors to withdraw
the papers from the purchaser.
At this stage
it is to be noted that no licence to assign had been obtained from the
landlord. The licence was requested that day and on January 22 Carter Faber
replied:
Thank you for
your letter of the 19th, with its enclosure also received by fax. We have a
standard form of licence which our client will require to be entered into and
we enclose a copy of this in duplicate.
We would
point out at this stage, we still await a bank reference for Mrs Bhoutross
confirming she is able to meet the rent and service charge due and stating the
relevant figures.
On January 25,
three days later, what might be called ‘the bombshell’ came in the form of a
letter from Hart Associates, who were the solicitors acting for the buyers.
Their letter said:
We now enclose
herewith the transfer in this matter by way of sub-sale. We would also be
grateful if you could let us know if you have heard from the landlords with
regard to the licence to assign in the name of Karolina De Brovolska being the
ultimate signee and in whose name the references were taken up.
We await to
hear from you and, in the meantime, enclose some standard requisitions.
Enclosed with
that letter was the transfer notification to the Registry, which reads (in
part) as follows:
In
consideration of £395,000 paid as to £210,000 to Israel Berkowitz of 169
Carderdale Road, London and as to £185,000 paid as to Nadir Bhoutross of . . .
[address inserted] . . . the receipt of which sum is respectively hereby
acknowledged the transferor as beneficial owner at the request and by the
direction of Miss Bhoutross hereby transfers the land and property comprised in
the title above-mentioned to Karolina De Brovolska of 2 Middle Mill House, 30
Armory Way, London SW18.
Mr Berkowitz’s
solicitors’ reaction was, first of all, to seek information from all concerned
as to who had taken up the references for the subpurchaser and to whom they had
been submitted. A reply from Lomazni Berwick was received by fax dated February
1, which said:
We act for
Miss K De Brovolska, the sub-purchasers in respect of the above premises. We
have just received a copy of your letter dated 26th January addressed to our
immediate vendor’s solicitors, Hart Associates. We are sending a copy of the
letter of application which we wrote to the National Westminster Bank, asking
for a reference on behalf of our client. The reference from Marchmaine
consultants was given by them at the direct request of our client and addressed
to ourselves. These references, as far as we are aware, were then forwarded by
the agents to the landlords. If there is any way in which we can now assist in
obtaining the requisite licence in favour of our clients, we would be most
grateful. We are otherwise in a position to proceed.
On February 2
the writ of summons in the present proceedings was issued and an ex parte
Mareva injunction was obtained against all the defendants, in respect of
the sum of £185,000 payable to Mrs Bhoutross, pursuant to the subsale. This
injunction was premised on an allegation that the first defendants knew of the
existence of a subpurchaser ever since January 4, that they knew of the price
to be paid by the subpurchaser and they did not disclose their knowledge to the
plaintiff because they were in collusion with the purchaser and, thus were not
acting in the plaintiff’s best interests.
Against the
background of that injunction completion took place on February 6, though I do
not think that the licence to assign was completed until the 9th. In the
meantime the Mareva injunction was discharged on an inter partes
hearing on February 8.
The nature of
the subsale has been the subject of considerable investigation since. The
defendants called Mr John Kitchen, a security superintendent of Eagle Star, who
produced his company’s file on the matter, under subpoena. This revealed that
in February 1990 a Miss De Brovolska made an application for a mortgage loan on
310 Clive Court. The purchase price was said to be £395,000 and a loan of
£296,000 was duly approved. Since the loan sought was less than 75% of the
purchase price, Eagle Star treated it as a non-status loan, relying solely on
the security of the property. References were taken up: one from a firm of
accountants whose address was 377 City Road, the very same address as
Marchmaine Consultancy plc who had introduced the business to Eagle Star and,
indeed, who had provided one of the references to Lomazni Berwick, which had
been forwarded to the landlords. A valuation was also purportedly provided by
Marchmaine Consultancy, apparently executed by a representative of Sanders
& Co, one of Eagle Star’s approved valuers. The loan was drawn down, but
not a penny has ever been paid upon it.
All in all the
conclusion is — and this was not seriously in dispute — that the subsale was an
entirely bogus transaction performed so as to defraud Eagle Star. Miss De
Brovolska is, to all intents and appearances, a woman of straw. Her home
address turned out to be in a block of council flats in Wandsworth, where she
did not reside; her office address appears to be an unmarked block in
Knightsbridge; the references for her are either unreliable or bogus. More
important, the purchase price was so far above the market value of the flat as
itself to be consistent only with a transaction which was not at arm’s length.
The defendants
called Mr Anthony Margo [FRICS], a chartered surveyor, who gave evidence that
in his opinion the market value of 310 Clive Court in January 1990 was about
£210,000. I accept that evidence, which again was not seriously in dispute. I
accept of course that there is obviously a margin of error and, indeed, special
reasons may justify a higher price for a particular purchaser. But, that said,
I also accept Mr Margo’s evidence that the figure of £395,000 is not consistent
with an honest purchase. That seems to me to be no more than a common-sense
reaction of any person having regard to the circumstances in this case. I
should add for the sake of completeness that the plaintiff produced no expert
evidence of his own.
Let me now
turn to the issue of liability in principle. The scope of the defendants’
obligations were not, so far as I could tell, in issue — or not seriously so.
So far as the first defendants are concerned, it was common ground on the
pleadings that it was an implied term of their retainer that they would
exercise all reasonable care in the provision of their agency services,
including using their best endeavours to secure the best possible price for the
flat. No doubt there were fiduciary duties as well but, on the facts that I
have found, no question arises as to a conflict between the personal interests
of the first defendants or the third defendant and their duties owed to the
plaintiff. If and in so far as the Canadian decision of Jackson v Packham
Real Estate Ltd (1980) 28 OR (2d) 261, which was drawn to my attention by
the plaintiff, expresses a different view of the law, I decline to follow it.
So far as the
third defendant is concerned, it was not challenged that he owed a duty of care
to the plaintiff, despite the loss allegedly sustained being purely pecuniary.
That concession is probably correct, given Mr De Brito’s status as a professional
man, or at least holding himself out as having some professional skills: see Punjab
National Bank v De Boinville [1992] 1 Lloyd’s Rep 7.
Was there a
breach of these duties?
The primary
complaint centred on the receipt by Mr De Brito of the references from Vickers
on January 4. It is accepted by Mr De Brito that he never read them, but merely
passed them on to the landlord’s solicitors. In my judgment, there was nothing
unreasonable in that course of action; he was merely acting as a post box. The
references might just as well have been faxed direct to Carter Faber by
Vickers, or indeed by the solicitors acting for the purchasers.
The plaintiff
also relies upon the failure to take action on Carter Faber’s fax of January 9.
This point, I should say at the outset, does not concern Mr De Brito, since it
was sent to Mr Jonathan Hall. I have not heard from Mr Hall and I am therefore
bound to conclude that the fax was either lost or ignored. In my judgment, that
fell short of the ordinary standards of care to be expected of the first
defendants and accordingly I must turn to the more difficult questions of
causation and damages to determine whether the defendants’ liability extends to
more than merely nominal damages.
The
plaintiff’s case is that, if proper action had been taken on the fax of January
9, he and his advisers would have ascertained the existence of the subsale and,
second, that he and his advisers would have renegotiated the price. I must
remind myself that it is for the plaintiff to prove his case on damages. Of
course, where it is clear that some substantial loss has been incurred, the
fact that it is
less, the plaintiff must establish the probability of a substantial loss.
As regards the
first limb of the argument, that is to say the existence of the subsale would
have been unearthed, I can say only that I am far from satisfied that it would.
In my view, the proper action for Mr Hall to have taken was to send the fax on to
Vickers for action. It must be remembered that the subsale was the creation of
a fraud and no doubt a convincing explanation would have been found, if needed,
for the change of name. I do not think that the fax should have been sent on to
the plaintiff or his solicitors. Even if I am wrong about that, I do not think
that the mere fact of a different name being the subject of the references
would have alerted anyone — and I include the plaintiff and his advisers, as
well as the first defendant, in this — to the possibility of a subsale. I
accept Mr De Brito’s evidence that different names commonly crop up in sales to
overseas buyers.
It must be
remembered that the plaintiff would not be quick to identify obstacles to the
smooth conclusion of the deal. He was under pressure to sell. With interest
rates at 14%, there can be no doubt that this flat was soon to become a
loss-making proposition. This point allies into the question of renegotiation.
I must not
lose sight of the fact that what prompted the plaintiff’s dismay in February
was not so much the mere fact of a subsale, but a subsale at what appeared to
be an enormous profit. But this is two-edged. Put in more homely language, the
plaintiff is really complaining that he has been deprived of the chance of having
a share of the proceeds of the subsale, which subsale was (at least in my
judgment) entirely dishonest. It seems to me that a claim based upon the chance
of renegotiation must fail. Either the plaintiff would have pressed on
regardless because, unaware of the sum involved, the mere fact of a subsale
would not have deterred him from regularising his position with his bankers;
or, alternatively, active attempts to delve into the terms of the subsale would
have brought the fraudulent scheme to a grinding halt.
I could add
this. If the plaintiff had become aware by this process of the true subsale
price, it would, or should, have become immediately apparent that the deal was
dishonest. Any claim to damages in those circumstances would be premised on his
willingness to negotiate and participate with the dishonest parties to that
scheme. Should the plaintiff have renegotiated with the purchaser and thereby
obtained more than the market value of the property, he would thereby become,
at worst, a party to the fraud of Eagle Star or, at best, a constructive
trustee of the increment to the market value. In other words, he would be
unable to establish any loss.
For all those
reasons, in my judgment, the claim for substantial damages must fail.
So far as the
counterclaim is concerned, I am quite satisfied that the breach of contract was
not repudiatory and no question of a loss of the right to commission arises
(and I refer, of course, to Kepple v Wheeler [1927] 1 KB 577).
Accordingly,
there must be judgment for the plaintiff against the first defendants for
nominal damages, which I assess at £5, and there will be judgment for the first
defendants on the counterclaim.
Judgment for
the plaintiff on the plaintiff’s claim and for the defendant on the
counterclaim.
